I will have to use separate databases with jos_ prefix due to the fact that the primary compenent requires the jos prefix.

1) I have Cpanel with Fantastico... can I use Fantastico to setup my primary website?

2) primary website will reside here: domain1.com/public_http

3) 1st slave site will reside here: domain2.com/public_http/slave1

how do I get the 1st slave site to show it's own domain separate from the primary domain?
I know this may be beyond your scope of help with your extension but you definiately know a whole lot more than I.

4) 2nd slave site will reside here: domain2.com/public_http/slave1/slave2

is it possible to have nested directories? because in this case I would want the 2nd slave to look like this... www.domain2.com/slave2

or can I do this... domain2.com/public_http/slave2 and have it show up like this:
www.domain2.com/slave2

5) do I need to create the databases prior to adding the slave sites or does your extension create those for me?

1) Yes you can use fantastico to setup your primary domain but if you had a look in the video 0.b - slide 21-24, we recommend to install the master in another directory that is not in the "primary domain" root directory.
The idea is to keep the "primary domain" root directory as clean as possible and to never install subdomains or addon domain in this primary directory.

So Yes you can do but we do not recommend it.
In general we recommend to create a subdomain like master.domain.com that is located in the directory /subdomains/master/public_html

2) In general, you can not change the primary domain directory.
I am surprise that you mentioned a primary domain in "domain1.com/public_http".
If you are using cPanel, the expected primary domain directory is "/public_html"

3) When creating an Addon Domain in cPanel, we recommend to have the "/domains/domain2.com/public_html"
When this is a subdomain of a primary domain, we recommend using "/subdomains/slave1/public_html"
If subdomain of an AddOn domain then "/domains/domain2.com/subdomains/slave1/public_html"
Review video 0.b slide 21-24
www.jms2win.com/en/tutorial#jms12x-0b

4) Why do you want to create a slave2 into a subdirectory of the slave1.
Perhaps you want to do that for a domain like "slave2.slave1.domain1.com"
In this case, we recommend "/domains/domain1.com/subdomains/slave1/subdomains/slave2/public_html"

Yes you can create subdirectories.
The difference with our rule is that subdomain or domain always have a specific directory that is never shared with the other domain or subdomain.

The only case where the subdirectories are like you described is when you have a URL with a subdirectory (ie. www.domain1.com/slave1/slave2)

5) It is possible to create dynamically the DB and the MySQL user when you provide the MySQL Root login into the "multisites.cfg.php" configuration file.
See user manual page 14.